I enjoyed chatting with a group of investors from the Financial Wisdom Forum recently. Over drinks, we quickly got to telling tall-tales about life's more colourful moments. But I'll spare you the details of a dog's unfortunate encounter with a septic tank.
More than a few members of the forum are sophisticated, self-directed investors who like to help those who are just starting to invest on their own. But even the old hands encounter difficulties from time to time.
Scott, a retiree from Hamilton, ran afoul of an easily overlooked problem that afflicts all too many investors. He started investing seriously in 1996 and became a full-fledged, do-it-yourself investor in 2002. He likes to pick dividend-paying value stocks that are capable of growing their payouts over the long term. It's a strategy that has provided substantial capital gains over the years, which is quite pleasing.
Good absolute returns are one thing, but Scott also wisely compares his gains to those of the market. He figures that his Canadian picks have outperformed the market by more than 2 percentage points a year over the last decade, which is pretty good. Alas, the U.S. side of the ledger isn't as rosy. His U.S. stocks have underperformed the S&P 500 by more than 3 percentage points a year since 2007.
The poor U.S. results recently prompted Scott to take the sort of corrective action that only a few long-time stock pickers would contemplate. He decided to stop picking individual U.S. stocks and is moving to index funds instead.
His index fund of choice is the Vanguard FTSE All-World ex Canada ETF (VXC), which trades on the TSX and sports a low annual management fee of 0.25 per cent. The fund holds a blend of both U.S. and international stocks, which is a good thing because Scott's portfolio currently lacks sufficient exposure to the global markets.
I'm also a fan of the Vanguard fund, which represents one of the best options for index investors looking to buy a package of big international stocks in a cost-efficient manner. In addition, Vanguard has a nice habit of reducing the annual fees they charge from time to time, which is unusual for a money manager.
Scott's decision to stop picking U.S. stocks is an uncommon one. Most self-directed investors remain far too confident in their abilities for far too long. Instead, disappointing long-term results are often attributed to misfortune or peculiar circumstances rather than the lack of a competitive edge.
There is no shame in admitting that you're not the next Warren Buffett. The vast majority of investors aren't. Those who figure it out are likely to improve their returns dramatically by following simple low-cost mechanical methods such as investing in low-fee index funds.
Provided, of course, they can stick with it for the long-term, which is admittedly easier said than done.
Simpler portfolios can also help to mitigate an inevitable problem. After all, at some point we all have to face our own mortality. Once we pass on, our money management duties may fall to a family member who doesn't know much about investing.
A portfolio stuffed with dozens of stocks can be an intimidating mess to an inexperienced widow or widower. Should they seek professional help, they run the risk of falling into the clutches of a high-fee salesperson – or worse. A simple portfolio that they understand is more likely to serve them well.
Opting for a simpler approach will also allow Scott to spend a little more time with his friends and family. To my mind, that's what retirement is all about.